NRI dollar inflows drying up as rupee gains in strength

A rising Indian currency to the US dollar due to a surge in foreign fund flows, and lowering of interest rates on NRI deposits have made it unattractive for Indians abroad to bring in their earnings.

MUMBAI/KOLKATA: The flood of US dollar flows from NRIs that saved the Indian rupee last year when it was pummeled by global investors, has reduced to a trickle in August for the first time since the rates for non- resident rupee accounts were freed in December 2011, which may pressure the rupee again.

A rising Indian currency to the US dollar due to a surge in foreign fund flows, and lowering of interest rates on NRI deposits have made it unattractive for Indians abroad to bring in their earnings.

The government is now batting for appreciation to arrest its current account deficit, the excess of imports over exports, and fiscal deficit. NRIs, who were getting 57 to a US dollar a few months ago, now get 52.81.

After touching a peak of $2.8 billion net monthly inflow in May this year, there was a net $361 million of outflow from NRI deposits in August, according to RBI data.

"An appreciating rupee does not give incentives to NRIs in parking their funds in rupee-denominated instruments," said M Narendra, CMD, Indian Overseas Bank.

The flow may turn negative with the rupee appreciating 5.6% in the September quarter and the government talking of 50 to the US dollar. Banks, which were offering as much as 9.5% at the peak of the currency volatility, are now offering 8.5-8,75% on two-five year maturity.

NRI deposits are classified into three types. NRE(RA) deposit is one where the investor bears the loss because of currency movement at the time of repatriation. Under NRO, the US dollar investments are converted into rupees which cannot be repatriated but remain in India.

FCNR (B) is where the bank pays the promised interest rates in the US dollar by bearing the currency risk.

Any slowing of flows from the NRIs is an early indication that the currency may come under pressure as it is one of the most stable source of flows.

It rose substantially when the RBI freed interest rates on various deposits to save the currency that was the worse performer last year in the region which at one stage lost nearly a quarter of its value.

Although portfolio flow is strong at $7 billion this fiscal so far, it remains to be seen whether it continues with questions about sustaining the reforms push. Inflows through NRE(RA) also slowed down during August, in which only $58 million came in compared with $3.4 billion in May this year.

The festival season in the Gulf and India also could be one of the reasons for the negative flow, say bankers. Indians working in the Gulf region park their surplus in non-repatriable NRO deposits as countries in this region do not allow them to invest locally.

NRIs in the US and European markets, on the other hand, prefer repatriable schemes like NRE(RA) and FCNR-B.

The behavioural pattern of NRIs in the Gulf countries contributed to this de-growth, bankers said. They return home in summer holidays in July and August.

"We have seen a fall NRO deposits as Indians working in Gulf return home in summer holidays and typically go on splurging during this period," Federal Bank's head for international banking A Surendran said.